What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-06 · 187 added, 160 removed, 336 unchanged (51% of the section changed)

1 unchanged sentence

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our” shall mean Victory Capital Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries.

The following discussion is intended to assist in the understanding of our financial position at June 30, 2021 and December 31, 2020, results of operations for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 2021 and 2020, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes

included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 20 20 .

The following discussion is intended to assist in the understanding of our financial position at September 30, 2021 and December 31, 2020, results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020, and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2020.

This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q and in “Item 1A.

Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2020.

Our Business – We are a diversified global asset management firm with $161.9 billion in assets under management as of June 30, 2021.

Our Business – We are a diversified global asset management firm with $159.9 billion in assets under management as of September 30, 2021.

The Company operates a next-generation business model combining boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform.

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Our integrated model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence.

Victory Capital Management Inc.

(“VCM”) employs all of our U.S.

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Our direct to investor business serves the investment needs of individual clients including USAA members and the military community.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $161.9 billion at June 30, 2021.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $159.9 billion at September 30, 2021.

We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing institutional, retail, and direct to investor channels with deep penetration.

THB Asset Management Acquisition – Effective March 1, 2021, the Company completed the acquisition of certain assets of THB Asset Management (“THB”).

The acquisition expanded and diversified our investment platform, adding capacity constrained assets classes that we like and know well.

The acquisition expanded and diversified our investment platform, adding capacity constrained assets classes.

The team manages strategies in U.S.

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(“VCTA”), formally known as the USAA Transfer Agency Company.

The acquisition expanded and diversified the Company’s investment platform and increased

the Company’s size and scale.

The acquisition expanded and diversified the Company’s investment platform and increased the Company’s size and scale.

The acquisition also provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct distribution channel.

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In 2020, we paid $37.5 million in cash to sellers for the first annual contingent payment.

The estimated fair value of contingent consideration payable to sellers was estimated at $100.7 million at June 30, 2021 as compared to $92.5 million at December 31, 2020 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

The increase in the liability of $8.2 million in the first six months of 2021 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

Subsequent to September 30, 2021, the Company paid $37.5 million in cash to sellers for the second annual contingent payment, resulting in a reduction of the liability to $65.6 million as of the date of filing.

The estimated fair value of contingent consideration payable to sellers was estimated at $103.1 million at September 30, 2021 as compared to $92.5 million at December 31, 2020 and is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

The increase in the liability of $10.6 million in the first nine months of 2021 was recorded

in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

COVID-19 Pandemic – The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption.

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Assets under management :

AUM at June 30, 2021 increased by $7.6 billion, or 4.9%, to $161.9 billion from $154.3 billion at March 31, 2021, driven by positive market action of $7.7 billion and net inflows of $176 million partially offset by seed capital liquidation and fund closures totaling $275 million.

Net flows for the quarter ended June 30, 2021 were comprised of $302 million of net long-term inflows and $126 million of net short-term outflows.

AUM at June 30, 2021 and 2020 was $161.9 billion and $129.1 billion, respectively.

We generated $10.1 billion in gross flows and $176 million in positive net flows for the three months ended June 30, 2021 compared to $9.6 billion in gross flows and $11.9 billion in negative net flows for the same period in 2020.

Net flows for the three months ended June 30, 2021 were comprised of $0.3 billion of long-term inflows and $0.1 billion of short-term outflows.

AUM at June 30, 2021 and 2020 was $161.9 billion and $129.1 billion, respectively.

We generated $16.9 billion in gross flows and $1.0 billion in negative net flows for the six months ended June 30, 2021 compared to $24.5 billion in gross flows and $14.8 billion in negative net flows for the same period in 2020.

Net flows for the six months ended June 30, 2021 were comprised of $0.7 billion of net long-term outflows and $0.3 billion of net short-term outflows.

AUM at September 30, 2021 decreased by $2.0 billion, or 1.3%, to $159.9 billion from $161.9 billion at June 30, 2021, driven by negative market action of $2.1 billion.

Net flows for the quarter ended September 30, 2021 were comprised of $131 million of net long-term inflows and $113 million of net short-term outflows.

AUM at September 30, 2021 and 2020 was $159.9 billion and $132.7 billion, respectively.

We generated $5.8 billion in gross flows and $18 million in positive net flows for the three months ended September 30, 2021 compared to $5.4 billion in gross flows and $3.0 billion in negative net flows for the same period in 2020.

Net flows for the three months ended September 30, 2021 were comprised of $131 million of long-term inflows and $113 million of short-term outflows.

AUM at September 30, 2021 and 2020 was $159.9 billion and $132.7 billion, respectively.

We generated $22.7 billion in gross flows and $1.0 billion in negative net flows for the nine months ended September 30, 2021 compared to $29.9 billion in gross flows and $17.8 billion in negative net flows for the same period in 2020.

Net flows for the nine months ended September 30, 2021 were comprised of $0.6 billion of net long-term outflows and $0.4 billion of net short-term outflows.

Investment performance :

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Financial highlights :

Total revenue for the three months ended June 30, 2021 was $221.9 million compared to $181.9 million for the same period in 2020.

For the six months ended June 30, 2021 and 2020, total revenue was $434.9 million and $386.3 million, respectively.

Net income was $69.3 million for the three months ended June 30, 2021 compared to $44.7 million for the same period in 2020.

For the six months ended June 30, 2021 and 2020, net income was $134.5 million and $101.9 million, respectively.

Adjusted EBITDA was $112.2 million for the three months ended June 30, 2021, or 50.6% of revenue, compared to $86.3 million, or 47.5% of revenue, for the same period in 2020.

For the six months ended June 30, 2021, Adjusted EBITDA was $219.1 million, or 50.4% of revenue, compared to $177.8 million, or 46.0% of revenue, for the same period in 2020.

Total revenue for the three months ended September 30, 2021 was $226.3 million compared to $188.7 million for the same period in 2020.

For the nine months ended September 30, 2021 and 2020, total revenue was $661.1 million and $575.0 million, respectively.

Net income was $74.2 million for the three months ended September 30, 2021 compared to $55.7 million for the same period in 2020.

For the nine months ended September 30, 2021 and 2020, net income was $208.6 million and $157.6 million, respectively.

Adjusted EBITDA was $115.0 million for the three months ended September 30, 2021, or 50.8% of revenue, compared to $95.6 million, or 50.7% of revenue, for the same period in 2020.

For the nine months ended September 30, 2021, Adjusted EBITDA was $334.1 million, or 50.5% of revenue, compared to $273.5 million, or 47.6% of revenue, for the same period in 2020.

Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted EBITDA calculation and reconciliation of generally accepted accounting principles (“GAAP”) net income to Adjusted EBITDA.

Adjusted Net Income with tax benefit was $87.2 million for the three months ended June 30, 2021 compared to $65.1 million for the three months ended June 30, 2020.

For the six months ended June 30, 2021, Adjusted Net Income with tax benefit was $170.8 million compared to $133.5 million for the same period in 2020.

Refer to “Supplemental Non-GAAP Financial

Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income.

Adjusted Net Income with tax benefit was $92.6 million for the three months ended September 30, 2021 compared to $73.4 million for the three months ended September 30, 2020.

For the nine months ended September 30, 2021, Adjusted Net Income with tax benefit was $263.4 million compared to $206.9 million for the same period in 2020.

Refer to “Supplemental Non-GAAP Financial Information” for further information about the Adjusted Net Income calculation and reconciliation of GAAP net income to Adjusted Net Income.

On September 13, 2021, the Company announced that VCM had reached a definitive agreement to acquire 100% of New Energy Capital Partners (“NEC”).

Founded in 2004 and based in Hanover, New Hampshire, NEC is an alternative asset management firm focused on debt and equity investments in clean energy infrastructure projects and companies.

On November 1, 2021, the acquisition of NEC was completed, resulting in NEC becoming the Company’s eleventh investment franchise.

On September 24, 2021, the Company filed a Registration Statement on Form S-3 on behalf of Crestview Victory, Crestview, Reverence Capital Partners Opportunities Fund I, L.P., Reverence Capital Partners Opportunities Fund I (Cayman), L.P., and Reverence Capital Partners Opportunities Fund I (AI), L.P.

(collectively, the “Reverence Capital Funds”) and RCP Lake Co-Invest, L.P.

(the “Selling Shareholders”) to permit the Selling Shareholders to sell up to 44,973,804 shares of the Company’s Class A common stock from time to time.

On October 13, 2021, the Form S-3 was declared effective.

On September 27, 2021, the Company issued a press release announcing that its Board of Directors approved amendments to its corporate charter and bylaws to eliminate the Company’s dual-class share structure.

The charter amendment is subject to shareholder approval at a Special Meeting of Stockholders scheduled for November 19, 2021.

On October 28, 2021, the Company announced it was named in the Top 10 of Fortune’s 100 Fastest-Growing Companies for 2021.

On November 4, 2021, the Company entered into the WestEnd Purchase Agreement, pursuant to which the Company has agreed to purchase 100% of the equity interests of WestEnd, on the terms and subject to the conditions set forth therein.

The WestEnd Acquisition is expected to close by the end of 2021, and is subject to the satisfaction of certain closing conditions.

Founded in 2004, and headquartered in Charlotte, North Carolina, WestEnd provides financial advisors with a turnkey, core model allocation strategy for either a holistic solution or complementary source of alpha.

The firm offers four primary ETF strategies and one large cap core strategy, all in tax efficient Separately Managed Account (SMA) structures.

See Item 5, Other Information, for further details on the WestEnd Acquisition.

In connection with entering into the WestEnd Purchase Agreement, the Company secured commitments for a $505.0 million senior secured incremental first lien term loan B facility letter.

The availability of the incremental facility is subject to the satisfaction of certain customary conditions precedent.

Neither the closing of the incremental facility, nor the receipt of any other financing, is a condition to the WestEnd Closing.

Key Performance Indicators

The following table is a summary of key performance indicators utilized by management to assess results of operations:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

($ in millions, except for basis points and percentages)

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The following table presents our AUM by asset class as of the dates indicated:

September 30,

(in millions)

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(in millions)

For the Three Months Ended June 30, 2021

For the Three Months Ended September 30, 2021

Beginning AUM

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Net transfers

For the Three Months Ended June 30, 2020

For the Three Months Ended September 30, 2020

Beginning AUM

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Net transfers

The three months ended June 30, 2021 includes $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

(in millions)

Six Months Ended

June 30, 2021

Nine Months Ended

September 30, 2021

Beginning AUM

4 unchanged sentences

Net transfers (1)

Six Months Ended

June 30, 2020

Nine Months Ended

September 30, 2020

Beginning AUM

4 unchanged sentences

Net transfers

The six months ended June 30, 2021 includes the transfer in of $547 million of assets associated with the THB Asset Management acquisition, which closed on March 1, 2021 partially offset by $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

The nine months ended September 30, 2021 includes the transfer in of $547 million of assets associated with the THB Asset Management acquisition, which closed on March 1, 2021 partially offset by $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

The following table presents our AUM by distribution channel as of the dates indicated:

As of June 30,

As of September 30,

(in millions)

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Mutual Funds (1)

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Beginning AUM

4 unchanged sentences

Net transfers

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Beginning AUM

6 unchanged sentences

Mutual Funds (1)

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Beginning AUM

4 unchanged sentences

Net transfers (4)

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Beginning AUM

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domiciled pooled vehicles.

The three months ended June 30, 2021 includes $250 million of seed capital that USAA liquidated and $25 million related to Victory’s closure of two mutual funds and an ETF.

June 30, 2021 AUM compared to March 31, 2021 AUM .

At June 30, 2021, our total AUM was $161.9 billion, an increase of $7.6 billion, or 4.9%, from $154.3 billion at March 31, 2021, primarily driven by positive market action of $7.7 billion and net inflows of $176 million partially offset by seed capital liquidation and fund closures totaling $275 million.

Net inflows into our Solutions platform and global / non-U.S.

equity strategies of $2.0 billion and $0.5 billion, respectively, were partially offset by outflows from our fixed income and domestic equity strategies of $1.2 billion and $1.0 billion, respectively.

June 30, 2021 AUM compared to December 31, 2020 AUM .

Total AUM increased by $14.7 billion, or 10.0%, to $161.9 billion at June 30, 2021 compared to $147.2 billion at December 31, 2020.

September 30, 2021 AUM compared to June 30, 2021 AUM .

At September 30, 2021, our total AUM was $159.9 billion, a decrease of $2.0 billion, or 1.3%, from $161.9 billion at June 30, 2021, primarily driven by negative market action of $2.1 billion .

Net inflows into our fixed income and U.S small cap equity strategies of $0.3 billion and $0.2 billion, respectively, were partially offset by outflows from our U.S.

large cap and U.S.

mid cap equity strategies of $0.3 billion and $0.1 billion, respectively.

September 30, 2021 AUM compared to December 31, 2020 AUM .

Total AUM increased by $ 12.6 billion, or 8.6 %, to $ 159.9 billion at September 30, 2021 compared to $147.2 billion at December 31, 2020.

The increase in AUM was primarily due to positive market action of $ 13.4 billion and acquired assets of $547 million partially offset by net outflows of $1.0 billion and seed capital liquidation and fund closures of $275 million.

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GAAP Results of Operations

The following table presents our GAAP results of operations for the three and six months ended June 30, 2021 and 2020.

Three Months Ended June 30,

Six Months Ended June 30,

The following table presents our GAAP results of operations for the three and nine months ended September 30, 2021 and 2020.

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands, except per share data)

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Interest expense and other financing costs

Gain (loss) on debt extinguishment

Loss on debt extinguishment

Total other expense, net

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Investment Management Fees

Three months ended June 30, 2021 compared to June 30, 2020 .

Investment management fees increased by $38.0 million, or 29.2%, to $168.0 million for the three months ended June 30, 2021 from $130.0 million for the same period in 2020 due to an increase in average AUM over the comparable period.

Average AUM was $158.5 billion for the three months ended June 30, 2021 compared to $128.9 billion for the same period in 2020.

Six months ended June 30, 2021 compared to June 30, 2020 .

Investment management fees increased by $51.4 million, or 18.6%, to $328.3 million for the six months ended June 30, 2021 from $276.9 million for the same period in 2020 due to the same factors as discussed above in the quarterly section.

Average AUM was $154.8 billion and $136.5 billion, respectively, for the six months ended June 30, 2021 and 2020.

Three months ended September 30, 2021 compared to September 30, 2020 .

Investment management fees increased by $34.1 million, or 24.9%, to $171.4 million for the three months ended September 30, 2021 from $137.2 million for the same period in 2020 due to an

increase in average AUM over the comparable period , partially offset by a decline in revenue realization .

Average AUM was $ 1 62 .5 billion for the three months ended September 30 , 20 2 1 compared to $ 133.1 billion for the same period in 20 20 .

Nine months ended September 30, 2021 compared to September 30, 2020 .

Investment management fees increased by $85.5 million, or 20.6%, to $499.7 million for the nine months ended September 30, 2021 from $414.2 million for the same period in 2020 due to the same factors as discussed above in the quarterly section.

Average AUM was $157.3 billion and $135.4 billion, respectively, for the nine months ended September 30, 2021 and 2020.

Fund Administration and Distribution Fees

Three months ended June 30, 2021 compared to June 30, 2020 .

Fund administration and distribution fees increased by $2.0 million, or 3.9%, to $53.9 million for the three months ended June 30, 2021 from $51.9 million for the same period in 2020 due to an increase fund administration fees, partially offset by a decrease in transfer agent fees and a shift in the mix of assets to lower 12b-1 paying share classes.

Six months ended June 30, 2021 compared to June 30, 2020 .

Fund administration and distribution fees decreased by $2.9 million, or 2.6%, to $106.5 million for the six months ended June 30, 2021 from $109.4 million for the same period in 2020 due to the combination of a decrease in transfer agent fees and a shift in the mix of assets to lower 12b-1 paying share classes.

Three months ended September 30, 2021 compared to September 30, 2020 .

Fund administration and distribution fees increased by $3.5 million, or 6.8%, to $54.9 million for the three months ended September 30, 2021 from $51.4 million for the same period in 2020 due to an increase fund administration fees, partially offset by a decrease in transfer agent fees and a shift in the mix of assets to lower 12b-1 paying share classes.

Nine months ended September 30, 2021 compared to September 30, 2020 .

Fund administration and distribution fees were relatively flat, increasing $0.7 million, or 0.4%, to $161.5 million for the nine months ended September 30, 2021 from $160.8 million for the same period in 2020 due to the same factors as discussed above in the quarterly section.

Personnel Compensation and Benefits

The following table presents the components of GAAP personnel compensation and benefits expense for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30,

Six Months Ended June 30,

The following table presents the components of GAAP personnel compensation and benefits expense for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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The value of the equity awards is recognized as compensation expense over the vesting period.

Three months ended June 30, 2021 compared to June 30, 2020 .

Personnel compensation and benefits were $57.5 million for the three months ended June 30, 2021, an increase of $8.4 million, or 17.0%, from $49.1 million for the same period in 2020 due to the combination of an increase in the headcount due to the launch of the new direct to investor digital platform and an increase in incentive compensation as a result of an increase in earnings over the comparable period.

Incentive compensation and equity awards granted to employees and directors were $25.6 million and $4.3 million, respectively, for the three months ended June 30, 2021, compared to $20.8 million and $3.9 million, respectively, for the same period in 2020.

Salaries, payroll related taxes and employee benefits were $22.8 million and $20.4 million, respectively, for the three months ended June 30, 2021 and 2020.

Six months ended June 30, 2021 compared to June 30, 2020 .

Personnel compensation and benefits increased by $19.8 million, or 20.5%, to $116.5 million for the six months ended June 30, 2021 from $96.7 million for the same period in 2020 due to the same factors as discussed above in the quarterly section.

Salaries, payroll related taxes and employee benefits were $48.0 million and $37.0 million, respectively, for the six months ended June 30, 2021 and 2020.

Incentive compensation and equity awards granted to employees and directors were $48.8 million and $9.9 million, respectively, for the six months ended June 30, 2021 compared to $41.3 million and $9.9 million, respectively, for the same period in 2020.

Three months ended September 30, 2021 compared to September 30, 2020 .

Personnel compensation and benefits were $55.8 million for the three months ended September 30, 2021, an increase of $8.5 million, or 17.9%, from $47.4 million for the same period in 2020 due to the combination of an increase in the headcount due to the launch of the new direct to investor digital platform and an increase in incentive compensation as a result of an increase in earnings over the comparable period.

Incentive compensation and equity awards granted to employees and directors were $27.7 million and $4.0 million, respectively, for the three months ended September 30, 2021, compared to $22.3 million and $3.6 million, respectively, for the same period in 2020.

Salaries, payroll related taxes and employee benefits were $19.6 million and $18.4 million, respectively, for the three months ended September 30, 2021 and 2020.

Nine months ended September 30, 2021 compared to September 30, 2020 .

Personnel compensation and benefits increased by $28.3 million, or 19.6%, to $172.3 million for the nine months ended September 30, 2021 from $144.1 million for the same period in 2020 due to the same factors as discussed above in the quarterly section.

Salaries, payroll related taxes and employee benefits were $67.6 million and $55.3 million, respectively, for the nine months ended September 30, 2021 and 2020.

Incentive compensation and equity awards granted to employees and directors were $76.5 million and $13.9 million, respectively, for the nine months ended September 30, 2021 compared to $63.6 million and $13.5 million, respectively, for the same period in 2020.

Distribution and Other Asset ‑Based Expenses

The following table presents the components of distribution and other asset-based expenses for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30,

Six Months Ended June 30,

The following table presents the components of distribution and other asset-based expenses for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

4 unchanged sentences

Total distribution and other asset-based expenses

Three months ended June 30, 2021 compared to June 30, 2020 .

Three months ended September 30, 2021 compared to September 30, 2020 .

Distribution and other asset-based expenses are primarily based on AUM.

For the three months ended June 30, 2021, distribution and other asset-based expenses were $44.2 million, an increase of $2.6 million, or 6.2%, from $41.6 million for the same period in 2020.

The increase is primarily due to an increase in sub-administration, broker dealer distribution, and middle-office fees as a result of an increase in average AUM over the comparable period, partially offset by a beneficial change in asset mix of our underlying retail distribution platforms.

Six months ended June 30, 2021 compared to June 30, 2020 .

Distribution and other asset-based expenses were $86.3 million for the six months ended June 30, 2021, a decrease of $10.2 million, or 10.5%, from $96.5 million for the same period in 2020 primarily due to a change in asset mix of our underlying retail distribution platforms .

For the three months ended September 30, 2021, distribution and other asset-based expenses were $44.9 million, an increase of $5.7 million, or 14.7%, from $39.1 million for the same period in 2020.

The increase is primarily due to an increase in platform and broker dealer distribution fees as a result of higher average AUM over the comparable period.

Nine months ended September 30, 2021 compared to September 30, 2020 .

Distribution and other asset-based expenses were $131.2 million for the nine months ended September 30, 2021, a decrease of $4.4 million, or 3.3%, from $135.6 million for the same period in 2020 primarily due to a change in asset mix of our underlying retail distribution platforms .

General and Administrative

Three months ended June 30, 2021 compared to June 30, 2020 .

General and administrative expenses were $13.7 million for the three months ended June 30, 2021 compared to $13.3 million for the same period in 2020.

The increase of $0.4 million, or 3.2%, was primarily due to increases in facility, technology and professional fees partially offset by a reduction in transition service agreement costs related to the USAA AMCO Acquisition, which ended in the fourth quarter of 2020.

Six months ended June 30, 2021 compared to June 30, 2020 .

For the six months ended June 30, 2020 and 2019, general and administrative expenses were $27.0 million and $25.2 million, respectively, for a year over year increase of $1.8 million, or 7.3%.

Three months ended September 30, 2021 compared to September 30, 2020 .

General and administrative expenses were $13.8 million for the three months ended September 30, 2021 compared to $13.2 million for the same period in 2020.

The increase of $0.6 million, or 4.5%, was primarily due to increases in technology and professional fees partially offset by a reduction in transition service agreement costs related to the USAA AMCO Acquisition, which ended in the fourth quarter of 2020.

Nine months ended September 30, 2021 compared to September 30, 2020 .

For the nine months ended September 30, 2021 and 2020, general and administrative expenses were $40.8 million and $38.4 million, respectively, for a year over year increase of $2.4 million, or 6.4%.

The increase was due to the same factors as discussed above in the quarterly section .

Depreciation and Amortization

Three months ended June 30, 2021 compared to June 30, 2020 .

Depreciation and amortization increased by $0.5 million, or 12.7%, to $4.7 million for the three months ended June 30, 2021 from $4.2 million for the same period in 2020, due to the addition of depreciation expense related to the launch of the Company’s new direct to investor digital platform, which went live in November 2020 .

Six months ended June 30, 2021 compared to June 30, 2020 .

Depreciation and amortization increased by $0.9 million, or 10.5%, to $9.1 million for the six months ended June 30, 2021 from $8.2 million for the same period in 2020, due to the same factors as discussed above in the quarterly section.

Three months ended September 30, 2021 compared to September 30, 2020 .

Depreciation and amortization increased by $0.4 million, or 11.2%, to $4.4 million for the three months ended September 30, 2021 from $3.9 million for the same period in 2020, due to the addition of depreciation expense related to the launch of the Company’s new direct to investor digital platform, which went live in November 2020 .

Nine months ended September 30, 2021 compared to September 30, 2020 .

Depreciation and amortization increased by $1.3 million, or 10.7%, to $13.5 million for the nine months ended September 30, 2021 from $12.2 million for the same period in 2020, due to the same factors as discussed above in the quarterly section.

Change in Value of Consideration Payable for Acquisition of Business

Three months ended June 30, 2021 compared to June 30, 2020 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $5.7 million, resulting in a change in the estimated fair value of consideration payable of $5.7 million for the three months ended June 30, 2021.

Three months ended September 30, 2021 compared to September 30, 2020 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $2.4 million, resulting in a change in the estimated fair value of consideration payable of $2.4 million for the three months ended September 30, 2021.

Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

Six months ended June 30, 2021 compared to June 30, 2020 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $8.2 million, resulting in a change in the estimated fair value of consideration payable of $8.2 million for the six months ended June 30, 2021.

Nine months ended September 30, 2021 compared to September 30, 2020 .

The fair value of the contingent consideration associated with the USAA AMCO acquisition increased by $10.6 million, resulting in a change in the estimated fair value of consideration payable of $10.6 million for the nine months ended September 30, 2021.

Refer to Note 4, Acquisitions, for further details on the fair value of contingent consideration payable.

Acquisition‑Related Costs

Three months ended June 30, 2021 compared to June 30, 2020 .

Acquisition-related costs for the three months ended June 30, 2021 were $422 thousand and ($23) thousand for the three months ended June 30, 2020.

The June 30, 2021 acquisition related costs were related to legal fees and advisory services for potential acquisitions.

Six months ended June 30, 2021 compared to June 30, 2020 .

Acquisition-related costs for the six months ended June 30, 2021 and 2020 were $0.3 million and ($0.1) million, respectively.

The increase for the six months ended June 30, 2021 was due to the same factors as discussed above in the quarterly section.

Three months ended September 30, 2021 compared to September 30, 2020 .

Acquisition-related costs for the three months ended September 30, 2021 were $6.0 million and $1.1 million for the three months ended September 30, 2020.

The September 30, 2021 acquisition related costs were primarily related to an estimated liability for potential one-time payments related to a prior acquisition.

Nine months ended September 30, 202 1 compared to September 30, 20 20 .

Acquisition-related costs for the nine months ended September 30 , 20 2 1 and 20 20 were $ 6.3 million and $1.1 million, respectively.

The increase for the nine months ended September 30, 20 21 was due to the same factors as discussed above in the quarterly section.

Restructuring and Integration Costs

Three months ended June 30, 2021 compared to June 30, 2012 .

Restructuring and integration costs for the three months ended June 30, 2021 was $0.4 million and $2.6 million for the three months ended June 30, 2020.

Three months ended September 30, 2021 compared to September 30, 2020 .

Restructuring and integration costs for the three months ended September 30, 2021 was $18 thousand and $1.3 million for the three months ended September 30, 2020.

The decrease is primarily due to integration and conversion costs related to the USAA AMCO Acquisition in 2020.

Six months ended June 30, 2021 compared to June 30, 2020 .

Restructuring and integration costs were $2.5 million and $3.6 million, respectively, for the six months ended June 30, 2021 and 2020.

The six months ended June 30, 2021 restructuring and integration costs were related to personnel restructuring within the direct to investor business compared to integration and conversion costs associated with the USAA AMCO Acquisition in 2020.

Nine months ended September 30, 2021 compared to September 30, 2020 .

Restructuring and integration costs were $2.5 million and $4.9 million, respectively, for the nine months ended September 30, 2021 and 2020.

The nine months ended September 30, 2021 restructuring and integration costs were related to personnel restructuring within the direct to investor business compared to integration and conversion costs associated with the USAA AMCO Acquisition in 2020.

Interest Income and Other Income (Expense)

Three months ended June 30, 2021 compared to June 30, 2020 .

Interest income and other income/(expense) was income of $1.9 million for the three months ended June 30, 2021 compared to income of $3.0 million for the same period in 2020.

The income for the three months ended June 30, 2021 was primarily due to a $1.5 million increase in the net unrealized fair value of deferred compensation plan investments.

The income for the three months ended June 30, 2020 was primarily due to a $2.6 million increase in the net unrealized fair value of deferred compensation plan investments.

Six months ended June 30, 2021 compared to June 30, 2020 .

For the six months ended June 30, 2021 and 2020, interest income and other income/(expense) was income of $4.7 million and expense of $1.2 million, respectively.

The higher income for the six months ended June 30, 2021 was primarily due to unrealized gains on deferred compensation plan investments and interest income on cash and cash equivalents.

The expense for the six months ended June 30, 2020 was primarily due to a decrease in the net unrealized fair value of deferred compensation plan investments partially offset by interest income on cash and cash equivalents.

Three months ended September 30, 2021 compared to September 30, 2020 .

Interest income and other income/(expense) was expense of $0.1 million for the three months ended September 30, 2021 compared to income of $1.1 million for the same period in 2020.

The expense for the three months ended September 30, 2021 was primarily due to a $0.7 million decrease in the net unrealized fair value of deferred compensation plan investments.

The income for the three months ended September 30, 2020 was primarily due to a $0.9 million increase in the net unrealized fair value of deferred compensation plan investments.

Nine months ended September 30, 2021 compared to September 30, 2020 .

For the nine months ended September 30, 2021 and 2020, interest income and other income/(expense) was income of $4.5 million and expense of $0.1 million, respectively.

The higher income for the nine months ended September 30, 2021 was primarily due to unrealized gains on deferred compensation plan investments and interest income on cash and cash equivalents.

The expense for the nine months ended September 30, 2020 was primarily due to a decrease in the net unrealized fair value of deferred compensation plan investments partially offset by interest income on cash and cash equivalents.

Interest Expense and Other Financing Costs

Three months ended June 30, 2021 compared to June 30, 2020 .

Interest expense and other financing costs decreased $3.6 million to $6.2 million for the three months ended June 30, 2021, compared to $9.7 million for the same period in 2020 d ue to a decrease in interest payments as a result of a lower debt principal balance and lower average interest rate over the comparable period.

Six months ended June 30, 2021 compared to June 30, 2020 .

For the six months ended June 30, 2021 and 2020, interest expense and other financing costs were $13.0 million and $21.1 million, respectively.

Three months ended September 30, 2021 compared to September 30, 2020 .

Interest expense and other financing costs decreased $2.3 million to $5.9 million for the three months ended September 30, 2021, compared to $8.2 million for the same period in 2020 d ue to a decrease in interest payments as a result of a lower debt principal balance and lower average interest rate over the comparable period.

Nine months ended September 30, 2021 compared to September 30, 2020 .

For the nine months ended September 30, 2021 and 2020, interest expense and other financing costs were $18.9 million and $29.3 million, respectively.

The year-over-year decrease is primarily due to the same factors as discussed above in the quarterly section.

(Loss) Gain on Debt Extinguishment

Three months ended June 30, 2021 compared to June 30, 2020 .

(Loss) gain on debt extinguishment was a loss of $1.1 million for the three months ended June 30, 2021 compared to a gain of $0.1 million for the same period in 2020.

During the quarter ended June 30, 2021, the Company paid down $57.0 million of debt through prepayments and wrote off $1.1 million of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due.

During the quarter ended June 30, 2020, the Company repurchased and retired outstanding debt below par in the open market and recognized a $1.0 million gain partially offset by $0.9 million in the write-off of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due.

Loss on Debt Extinguishment

Three months ended September 30, 2021 compared to September 30, 2020 .

Loss on debt extinguishment was $0.7 million for the three months ended September 30, 2021 compared to $0.8 million for the same period in 2020.

During the quarter ended September 30, 2021, the Company paid down $35.0 million of debt through prepayments and wrote off $0.7 million of a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due.

During the quarter ended September 30, 2020, the Company repaid or repurchased and retired $43.5 million of outstanding term loans and recorded a $0.8 million loss on debt extinguishment.

Refer to Note 9, Debt, for further details on the 2019 Credit Agreement.

Six months ended June 30, 2021 compared to June 30, 2020 .

Loss on debt extinguishment was $3.9 million for the six months ended June 30, 2021, due to the write-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal under the 2019 Credit Agreement.

The expense for the six months ended June 30, 2020 was due to the write-off a pro-rata portion of the unamortized debt issuance costs and unamortized debt discount due to accelerating the paydown of debt principal partially offset by gains recognized on open market debt repurchases and retirements below par .

Nine months ended September 30, 2021 compared to September 30, 2020 .

Loss on debt extinguishment was $4.6 million for the nine months ended September 30, 2021, due to repayments of term loan principal and entering into the Second Amendment .

Loss on debt extinguishment was $1.7 million for the nine months ended September 30, 2020, due to term loan repurchases and repayments and entering into the First Amendment.

Income Tax Expense

Three months ended June 30, 2021 compared to June 30, 2020 .

The effective tax rate for the three months ended June 30, 2021 and 2020 was 22.9% and 24.5%, respectively.

Three months ended September 30, 2021 compared to September 30, 2020 .

The effective tax rate for the three months ended September 30, 2021 and 2020 was 19.7% and 23.4%, respectively.

The decrease in the effective tax rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020.

Six months ended June 30, 2021 compared to June 30, 2020 .

For the six months ended June 30, 2021 and 2020, the effective tax rate was 22.2% and 23.5%, respectively.

Nine months ended September 30, 2021 compared to September 30, 2020 .

For the nine months ended September 30, 2021 and 2020, the effective tax rate was 21.3% and 23.5%, respectively.

The decrease in the effective rate was primarily due to an increase in excess tax benefits on share-based compensation compared to the same period in 2020.

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The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Adjusted EBITDA

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Adding back direct incremental costs of acquisitions, including restructuring costs.

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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During the period of uncertainty related to the COVID-19 pandemic, we will continue to monitor our liquidity.

The following table shows our liquidity position as of June 30, 2021 and December 31, 2020.

The following table shows our liquidity position as of September 30, 2021 and December 31, 2020.

September 30,

(in thousands)

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Accounts and other payables

The balance at June 30, 2021 represents the Company’s $99.9 million revolving credit facility and a $0.1 million standby letter of credit used as collateral for THB’s real estate location.

The balance at September 30, 2021 represents the Company’s $99.9 million revolving credit facility and a $0.1 million standby letter of credit used as collateral for THB’s real estate location.

We manage our cash balances in order to fund our day-to-day operations.

2 unchanged sentences

We continue to actively monitor the impact of the COVID-19 pandemic on the collectability of certain receivables.

We maintained a $100.0 million revolving credit facility at June 30, 2021 and December 31, 2020 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of June 30, 2021 and December 31, 2020.

We maintained a $100.0 million revolving credit facility at September 30, 2021 and December 31, 2020 (under the 2019 Credit Agreement) which had approximately $100.0 million undrawn as of September 30, 2021 and December 31, 2020.

2019 Credit Agreement and 2020 and 2021 Debt Repricing

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All indebtedness outstanding under the previous credit agreement was repaid and terminated as of July 1, 2019.

For the three and six months ended June 30, 2021, the Company reduced outstanding debt by $57.0 million and $ 107 .0 million , respectively .

Subsequent to June 30 , 2021, the Company reduced outstanding debt by $3 5 .0 million, for a total debt reduction of $4 53 .8 million since July 1, 2019.

As of June 30 , 2021, we were in compliance with our financial performance covenant.

Refer to Note 4, Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition, as well as Note 9, Debt, for further information on the 2019 Credit Agreement.

For the three and nine months ended September 30, 2021, the Company reduced outstanding debt by $35.0 million and $142.0 million, respectively, for a total debt reduction of $453.8 million since July 1, 2019.

As of September 30, 2021, we were in compliance with our financial performance covenant.

Refer to Note 4,

Acquisitions, to the unaudited condensed consolidated financial statements for further details on the USAA AMCO Acquisition, as well as Note 9, Debt, for further information on the 2019 Credit Agreement.

On January 17, 2020, the Company entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank.

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Refer to Note 9, Debt, for further information on the repricing.

WestEnd Credit Facilities Commitments

On November 4, 2021, the Company entered into the WestEnd Purchase Agreement, pursuant to which the Company has agreed to purchase 100% of the equity interests of WestEnd on the terms and subject to the conditions therein.

In connection with entering into the WestEnd Purchase Agreement, on November 4, 2021 the Company secured commitments for a $505.0 million senior secured incremental first lien term loan B facility.

The availability of the incremental facility is subject to the satisfaction of certain customary conditions precedent.

Proceeds from the incremental facility are expected to be used to finance the WestEnd Acquisition and the payment of certain fees, commissions and expenses in connection therewith.

2020 Swap Transaction

On March 27, 2020, the Company executed a floating-to-fixed interest rate swap transaction (“Swap”) to effectively fix the interest rate at 3.465% on $450 million of its outstanding Term Loan through the Term Loan maturity date of July 2026.

At June 30, 2021, the $450 million notional value Swap had a fair value of $0.3 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets.

For the three and six months ended June 30, 2021, the Company recognized a loss, net of tax, of $3.0 million and income of $7.8 million, respectively, in accumulated other comprehensive income (loss).

For the three and six months ended June 30, 2021, the Company reclassified a loss of $0.9 million and $1.7 million, respectively, from accumulated other comprehensive income (loss) to interest expense and other financing costs on the unaudited Condensed Consolidated Statements of Operations.

On February 18, 2021, pursuant to the Second Amendment, the Company lowered the spread on the Term Loan by 0.25% resulting in a new fixed rate of 3.215% on the $450 million of Term Loan subject to the Swap.

At September 30, 2021, the $450 million notional value Swap had a fair value of $2.0 million, which was included in other assets on the unaudited Condensed Consolidated Balance Sheets.

For the three and nine months ended September 30, 2021, the Company recognized income, net of tax, of $1.3 million and $9.1 million, respectively, in accumulated other comprehensive income (loss).

For the three and nine months ended September 30, 2021, the Company reclassified a loss of $0.9 million and $2.6 million, respectively, from accumulated other comprehensive income (loss) to interest expense and other financing costs on the unaudited Condensed Consolidated Statements of Operations.

Refer to Note 14, Derivatives, for further information on the Swap.

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The following table is derived from our unaudited Condensed Consolidated Statements of Cash Flows:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

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Net cash used in financing activities

Operating Activities – Cash provided by operating activities during the six months ended June 30, 2021 was $164.2 million, compared to $120.9 million of cash provided by operating activities for the same period in 2020.

The $43.3 million increase in cash provided by operating activities was primarily due to a $32.6 million and $10.9 million increase in net income and non-cash items.

Cash provided by operating activities during the six months ended June 30, 2020 was $120.9 million and comprised of $101.9 million and $34.9 million of cash provided by net income and non-cash items, partially offset by $15.8 million in working capital source of cash.

Investing Activities – Cash used in investing activities during the six months ended June 30, 2021 was $7.3 million and consisted of property and equipment purchases of $5.6 million and $1.5 million of net trading activity.

Cash used in investing activities during the six months ended June 30, 2020 was $6.9 million and consisted of property and equipment purchases of $5.3 million and $1.6 million of net trading activity.

Financing Activities – Cash used in financing activities during the six months ended June 30, 2021 was $148.0 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $107.0 million, $17.7 million, $14.6 million, and $8.6 million, respectively.

Cash used in financing activities during the six months ended June 30, 2020 was $95.8 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $70.3 million, $13.1 million, $7.0 million, and $6.1 million, respectively.

Operating Activities – Cash provided by operating activities during the nine months ended September 30, 2021 was $264.1 million, compared to $182.7 million of cash provided by operating activities for the same period in 2020.

The $81.3 million increase in cash provided by operating activities was primarily due to a $51.0 million increase in net income and $26.1 million increase in working capital source of cash.

Cash provided by operating activities during the nine months ended September 30, 2020 was $ 182.7 million and comprised of $ 157.6 million and $ 60.1 million of cash provided by net income and non-cash items, partially offset by $ 35.0 million in working capital source of cash.

Investing Activities – Cash used in investing activities during the nine months ended September 30, 2021 was $11.0 million and consisted of primarily of property and equipment purchases of $8.3 million and $2.1 million of net trading activity.

Cash used in investing activities during the nine months ended September 30, 2020 was $10.5 million and consisted of property and equipment purchases of $7.0 million, $1.6 million of net trading activity and $1.5 million for an equity investment in Alderwood Partners LLP (“Alderwood”).

Financing Activities – Cash used in financing activities during the nine months ended September 30, 2021 was $211.0 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $142.0 million, $25.9 million, $25.4 million, and $17.7 million, respectively.

Cash used in financing activities during the nine months ended September 30, 2020 was $153.0 million and was mostly attributable to repayment of long-term debt under the 2019 Credit Agreement, repurchases of common stock, payment of dividends, and net activity related to stock-based equity awards of $113.4 million, $22.8 million, $11.5 million, and $5.9 million, respectively.

Contractual Obligations

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Pursuant to the Second Amendment, the Company repriced its Term Loan, lowering the interest rate spread by 25 basis points, from 2.50% over LIBOR, to 2.25% over LIBOR.

For the three and six months ended June 30, 2021, the Company recorded an increase of $5.7 million and $8.2 million, respectively, in the USAA AMCO Acquisition contingent payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

For the three and nine months ended September 30, 2021, the Company recorded an increase of $2.4 million and $10.6 million, respectively, in the USAA AMCO Acquisition contingent payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing.

During the fourth quarter of 2020, the Company paid $37.5 million in cash to sellers for the first annual earn out period.

A maximum of $112.5 million in contingent consideration ($37.5 million per year for the remaining 3 years of the earn out period) was payable to sellers at June 30, 2021.

In the fourth quarter of 2020, the Company paid $37.5 million in cash to sellers for the first annual earn out period.

A maximum of $112.5 million in contingent consideration ($37.5 million per year for the remaining 3 years of the earn out period) was payable to sellers at September 30, 2021.

Subsequent to September 30, 2021, the Company paid $37.5 million in cash to sellers for the second annual earn out period.

There were no other significant changes to our contractual obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2020.

Off‑Balance Sheet Arrangements

In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests.

In connection with dividends declared in December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests.

Holders of stock options that were unvested at the time the December 2017 dividend was declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest.

1 unchanged sentence

Holders of restricted stock awards that are unvested at the time the quarterly dividends are declared are entitled to be paid these dividends as and when the restricted stock vests.

As of June 30, 2021 and December 31, 2020, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $1.2 million, which was not recorded as a liability as of the balance sheet date.

As of September 30, 2021 and December 31, 2020, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $0.8 million and $1.2 million, respectively, which was not recorded as a liability as of the balance sheet date.

A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest.

12 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis